CHAPTER ONE: BACKGROUND TO THE STUDY

1.1 INTRODUCTION

The compensation of employees at all level has become one of the major functions of
human resource management. It is one of the most important, complex and problematic
issues in managing human resources in any organization. Every business enterprise that
wants to gain competitive advantage over its competitors must attract the services of high
quality employees. According to M.C Faraland (2001) ‘Man is a rational animal covered
with maximizing his economic gains’. He continuously put forth effort to satisfy his
personal needs ranging from physiological needs to self-actualization.

Maslow states that it is the way to desire to satisfy the needs that motivate workers into
higher performances and productivity, they strive to increase their output and efficiency in
order to acquire the means for satisfying these needs.

Mutter & Donald (2003) describes remuneration as payment system based on effort,
performance and productivity in essence; remuneration refers to salary or wages and the
allowanced and financial benefits payable to employee, either in cash or kind in return for
his service. In a nutshell remuneration is the price of labour. Essentially, employees work
to produce reward for their performances. Thus, the exchange of labour for financial reward
is the heart of the compensation process. However, formal compensation can be offered
using three types of reward namely;
Pay, Incentives and Benefits.

Compensation management is an integral part of management. Compensation management

is a systematic approach to providing monetary values to employees in exchange for work
performed. It may achieve several purchases assisting in recruitment, job performance and
job satisfaction. It is an organized practice that involves balancing the work employee
relation by providing monetary and non-monetary benefits to employees. It is a tool used
by management for a variety of purpose to further the existence and growth of the company.
It may be attuned according to economic scenario, the business needs goals and available
resources.
Compensation management contributes to the overall success of the organizations in
several ways. To be effective, the managers must appreciate the value of competitive pay,
to maintain and retain quality employees while recognizing the need to manage pay roll
costs.
There are two different types of compensation management:

DIRECT COMPENSATION is typically comprised of salary payment and health

benefit. The creation of salary ranges and pay scales for different positions within the
company are the central responsibility of compensation management staff. Effective
compensation plan are routinely compared with other firms in the same industry or against
published bench marks. Although some jobs are unique within a specific firm, the vast
majority of positions can be compared to similar jobs in other firms or industries. Thus,
direct compensation that is in line with industry standard provides employees with the
assurance of fair compensation. This helps the employer avoid the costly loss of trained
staff to a competitor.

INDIRECT COMPENSATION focuses on the personal motivations of each person to

work. Although salary is important, people are most productive in jobs where they share
the company’s values and priorities. Common types of indirect compensation include free
staff development courses, subsidized day care, opportunity for promotion or transfer
within the company. Public recognition, ability to effect change in the work place and
service to others.
An effective compensation package has a combination of direct and indirect compensation.
Compensation management programs often include salary range for each position, with
incremental increases and annual reviews. During these review sessions, both type of
compensation management are addressed and presented to the employee as part of the total
package.

Compensation is the combination of monetary and other benefits provided to an employee

in return for their time and skill.
The field of compensation management provides management with the ideal combination
of different remuneration types. The purpose of these types of program is to retain and
motivate good employees

1.2. STATEMENT OF PROBLEM

Non availability of staff buses to conveniently covey workers from their various areas to
make sure the meet the resumption time. Apart from this cafeteria is a place where food is
served, bought and eating during the break time, but this facility is lacking in the
organization. Irregular promotion/advancement for workers upgrade has become a threat
worrying the workers. The practice of man knows man/favourism. The workers complain
has taken over the organization. Some of the workers complain to have in one position over
4 – 5 years, while some of their colleagues get rapid and regular promotion. This act is the
outcome of God’s fatherism and man know man. The less privilege seldom gets their
promotion. The term work environment encompasses different aspects such as physical
work environment, management attitude towards employees, relationship with colleagues
and working condition. Recent research has highlighted the hypothesis that an employee’s
work environment can have a dramatic effect on his or her performance and attitude to
work. In addition to physical attributes of a work, place, hostile work environment are like
cancer that can eat through the core.

Productivity and employee performances faster and more devastating than any other work
associated instance which the company in question seriously need to deal with as it is
extremely disruptive to the work force. Teamwork is often viewed as an efficient
condensing the individual contributions of individuals into cohesive outcome. The term
‘Self-directed work teams have been used since the 1950s to describe teams of employees
working together toward one common goal. In the typical work environment like Guaranty
Trust Bank plc, a self-directed work should be encouraged in employee’s work life for a
greater performance. Also workers complained there is inadequate remuneration and
incentives to commensurate with the nature and importance of the job they perform.
Employees look forward or anticipate certain rewards from management which are not
forth coming. There should be differentiation in pay due to our region, skills, talent and
capacities as well as a business overtime payment and retirement e.t.c.
1.3. OBJECTIVES OF THE STUDY
The study can be viewed as a contribution to greater understanding of compensation as an
instrument that can be employed to increase efficiency and productivity and the value to
secure and retain labour service. Other objectives include: -

1. To find the different compensation packages that exists in Guaranty Trust bank plc.

2 To find out from different employee’s view type of reward those reimburse
their morale for highest degree of performance, either monetary or non-monetary .

3 To identify the particular compensation package that motivates employee to higher

productivity
4 The study also seeks to find out different view of the employees in the
Organization concerning compensation packages operating in the company.

5 To identify the Strategic Business Unit (SBU) structure adopt by the company for
its efficiency and performance.
6 To find out the relationship between workers reward and their level of performance

1.4. RESEARCH QUESTION

(a). Does workers compensation propelled organization performance?

(b). Does employees compensation contribute to effectiveness of the organization?

(c). Does hostile work environment improves employees performance in Guaranty Trust
bank plc.?
(d) Which compensation package motivates employee to highest level of productivity?
(e). Can reward system increase employees level of performance?

(f). How can reward be linked to employee efficiency and productivity?

(g). Could reward be linked to job satisfaction?

(h). What are the perceptions of worker concerning compensation packages in Guaranty
Trust bank plc.

(i). Does employees pay commensurate with their performance?

(j). what suggestion/ recommendation would be proffered for the organization

compensation management?

(k) Would poor working condition, lack of promotion and inadequate salary structure,
reduce the output of employees?

1.5. RESEARCH HYPOTHESES

H0: Poor compensation packages will not reduce workers morale and will not affect their
productivity adversely.

H1: Poor compensation packages will reduce workers morale and will affect their
productivity adversely.
H0: Effective remuneration structure will not aid organization in achieving high level of
performance.
H1: Effective remuneration structure will aid organization in achieving high level of
performance.
H0: There is no relationship between workers reward and their level of performance.
H1: There is a positive relationship between workers reward and their level of performance.

.6. SIGNIFICANCE OF THE STUDY

The findings of this research are partial and theoretical significance not only with the
reference to the members of the work organization studied, but also with regard to the
available knowledge about problems of compensation management.

The research also enhances and broadens the knowledge of the management that attained
of organization goals is aimed at involving all parties in the organization, the management,
the employees and the customers/suppliers. The significant derived from this study will
enable the management to realize that poor working condition, lack of promotion,
inadequate salary structure e.t.c. will immensely reduce the output of employees. This
study is a contribution to the body of knowledge existing. In the field of human resources
management especially in wages and salaries, administration because of the approach

brought to bear upon the research which may see compensating management in different
light from much of the existing literature on compensation of workers in Nigeria. The
importance of this study is to see the relationship (if any) between salaries, wages, and
other staff motivations and organizational performances.

1.7. SCOPE OF THE STUDY

The study tries to examine compensation management and organizational performance and
how employees reward could be linked to efficiency and higher productivity with a
particular reference to Guaranty Trust bank plc. The scope of the research is limited in both
depth and coverage, the study concerning the examination of independent variable
affecting compensation of employees and organizational performances in Guaranty Trust
bank plc. The study will not cover all the variety of products producing in the company
because of the problem that may be encountered when administering questionnaires on
employees in all the industries all over Nigeria. As such, this study will adhere strictly to
Guaranty Trust bank plc. centralized processing center, Lekki-Elegushi, Lagos State

1.8 HISTORICAL BACKGROUND OF GUARANTY TRUST BANK CENTRAL

PROCESSING CENTRE, LEKKI, LAGOS
Guaranty Trust Bank PLC also known as GTBank or simply GTB is a Nigerian
Multinational Financial Institution that offers Online/Internet Banking, Retail Banking,
Corporate Banking, Investment Banking and Asset Management services, with its head
office in Victoria Island, Lagos
The bank was formed in 1988 by over 35 young Nigerians in their thirties, spearheaded
mostly by Tayo Aderinokun and Fola Adeola.
Guaranty Trust Bank plc was incorporated as a limited liability company licensed to
provide commercial and other banking services to the Nigerian public in 1990 and
commenced operations in February 1991.
In September 1996, Guaranty Trust Bank plc became a publicly quoted company and
won the Nigerian Stock Exchange President’s Merit award. In February 2002, the Bank
was granted a universal banking license and later appointed a settlement bank by the
Central Bank of Nigeria (CBN) in 2003.
Guaranty Trust Bank undertook its second share offering in 2004 and raised over N11
billion from Nigerian Investors to expand its operations.

1.9 LIMITATION OF THE STUDY

This research is affected by non-availability of fund. This however, is caused by the poor
standard of living in the country which emanated from economic situation of the country
and high rate of inflation which has caused prices in commodities and other materials
needed by the researcher to increase.

 The time fame scheduled for the completion of the research is too limited.
o It is difficult to retrieve information from the populace because people prefer
to keep their privacy. In a situation where data over the year are needed, such
data are not often possible to collect.
o

1.10 OPERATIONAL DEFINITION OF TERMS

 Pay: This is a generally rewards as the most important form of compensation

because of the role it plays in employees motivation of putting all his effort towards
organization productivity. Pay is the basic compensation employee receives usually
inform of wages or salary.
 Incentives: These are rewards designed to encourage and reimburse employees for
effort beyond normal performance expectations. It includes bonus, commission,
profit sharing, plans, piece work, stock option, cost reduction, suggestion plan,
production bonus plan e.t.c. incentive pay has the following benefit:
o Motivation: linking pay to performance increase employees’ motivation to
perform i.e superior performance is encouraged and inferior. Performance is
discouraged
o Retention: high performance is more motivated to stay with an organization.
 o Productivity: because incentive pays encourage superior performances, an
organization’s productivity can be highly improved
o Organizational goals: it helps to designing individual goals with
organizational goals.

 Benefits: These are rewards available to employees as part of organizational

membership. These includes free medical treatment, vocational or leave pay, call
back pay, lay off pay, rest period pay, lunch subsidy, accident insurance, disability
insurance, scholarship for staff’s children.

According to flippo (2002), increasing management is accepting the idea that group as well
as individual can be motivated to work more effectively. Thus most of them embark on
employee compensation program which are designed to attract capable employees to the
organization, motivates them into superior performances and retain. This service over an
extended period of time. Services increase inefficiency and higher productivity is one of
the goals of an organization effective, compensation management is a step towards
achieving the goals
2.1 CONCEPTUAL FRAMEWORK

WHAT IS COMPENSATION MANAGEMENT?

Before delving into the meaning of the concept above, we have to first, take time to understand
the individual terms that it comprises of.

COMPENSATION

Compensation is any form of payment given to employees in exchange for work provided for their
employees. Schuller (1975) as cited in Nmadu (1999) says that compensation is the activity by
which organizations evaluate the contributions of employees in order to distribute fairly direct and
indirect, monetary and non-monetary rewards within the organizations’s ability to pay and legal
regulations. In simple terms, compensation is everything that a company offers its employees in
return for their talent and time. When organized the right way, compensation dollars can be
strategically leveraged to reduce turnover, boost employee engagement and attract top talent. The
purpose of compensation management is to make the most of company dollars in a way that
rewards employees for their work.

Wages refer to direct compensation received by an employee based on hourly piece rates while
salaries are pay regardless of specific hours worked and can be received weekly, monthly as the
case maybe.

Compensation is a primary motivator for employees. People look for jobs that not only suit their
creativity and talents, but compensate the moth in terms of salary and other benefits accordingly.
Compensation is also one of the fastest changing fields in Human Resources, as companies
continue to investigate various ways of compensating employees for performance.

Gary Dessler in his book Human Resource Management, defines compensation in these words;
"Employee compensation refers to all forms of pay going to employees and arising from their
employment." The phrase 'all forms of pay' in the definition does not include non-financial
benefits, but all the direct and indirect financial compensations.

According to Teeseema and Soeters (2006). "Compensation which includes direct cash payment,
indirect payments in the form of employee benefits and incentives to motivate employees to strive
for higher levels of productivity is a critical component of the employment relationship.
Compensation is affected by diverse forces such as labor market factors, collective bargaining,
government legislation and top management philosophy regarding pay and benefits".

Compensation may be defined as money received for the performance of work plus much kind of
benefits and services that organizations provide their employee. Compensation is a systematic
approach to providing monetary value to employees in exchange for work performed.
Compensation may achieve several purposes such as assisting in recruitment, performance
evaluation and job satisfaction.

Compensation is recompense, compensation, wage or salary given by an organization to persons

or a group of persons in return to a work done, services rendered, or a contribution made towards
the accomplishment of organizational goals Leary, (2004). Wage, dearness allowance, bonus and
other allowance are examples of monetary compensation, while good accommodation, children
education, transport facilities, subsidized ration of essential commodities, etc. come under non-
monetary compensation. In short, wage paid to collar workers or salaries paid to white collar
employee can be classified as compensation.

A good compensation package is a good motivator. Hence, the primary responsibility of the HR.
manager is to ensure that the company's employees are well paid.

MANAGEMENT

Management is a set of principles relating to the functions of planning, organizing, directing and
controlling, and the application of these principles in harnessing physical, financial, human and
informational resources efficiently and effectively to achieve organizational goals.

Many management thinkers have defined management in their own ways. For example, Van
Fleet and Peterson define management, ‘as a set of activities directed at the efficient and
effective utilization of resources in the pursuit of one or more goals.’

Kreitner’s definition of management: ‘Management is a problem solving process of effectively

achieving organizational objectives through the efficient use of scarce resources in a changing
environment.’

According to F.W. Taylor, ‘Management is an art of knowing what to do, when to do and see
that it is done in the best and cheapest way‘.
According to Harold Koontz, ‘Management is an art of getting things done through and with
the people in formally organized groups. It is an art of creating an environment in which people
can perform and individuals and can co-operate towards attainment of group goals.‘

A leader has certain inherent qualities and traits which assist him in playing a directing role and
wielding commanding influence which others. Leadership is an integral part of management and
plays a vital role in managerial operations, while management is an integral component of
technical as well as social processes. The practice of management is as old as human civilization.
However, the study of management in a systematic and scientific way as a distinct body of
knowledge is only of recent origin.

Management in some form or another is an integral part of living and is essential wherever
human efforts are to be undertaken to achieve desired objectives. The basic ingredients of
management are always at play, whether we manage our lives or our business.

MANAGEMENT FUNCTIONS:

The 4 basic management functions that make up the management process are described in the
following sections:

1. PLANNING
2. ORGANIZING
3. INFLUENCING
4. CONTROLLING.
PLANNING: Planning involves choosing tasks that must be performed to attain organizational
goals, outlining how the tasks must be performed, and indicating when they should be
performed.

Planning activity focuses on attaining goals. Managers outline exactly what organizations should
do to be successful. Planning is concerned with the success of the organization in the short term
as well as in the long term.

ORGANIZING:

Organizing can be thought of as assigning the tasks developed in the planning stages, to various
individuals or groups within the organization. Organizing is to create a mechanism to put plans
into action.
People within the organization are given work assignments that contribute to the company’s
goals. Tasks are organized so that the output of each individual contributes to the success of
departments, which, in turn, contributes to the success of divisions, which ultimately contributes
to the success of the organization.

INFLUENCING:

Influencing is also referred to as motivating, leading or directing. Influencing can be defined as

guiding the activities of organization members in the direction that helps the organization move
towards the fulfillment of the goals.

The purpose of influencing is to increase productivity. Human-oriented work situations usually

generate higher levels of production over the long term than do task oriented work situations
because people find the latter type distasteful.

CONTROLLING:

Controlling is the following roles played by the manager:

1. Gather information that measures performance

2. Compare present performance to pre- established performance norms.
3. Determine the next action plan and modifications for meeting the desired performance
parameters.
Controlling is an ongoing process.

COMPENSATION MANAGEMENT

Having seen the definitions above, we can now proceed to look at what compensation management
is all about.

According to Bowman (2006), Compensation management can be defined as all the employers’
available tools that may be used to attract, retain, motivates and satisfy employees. This
encompasses every single investment that an organization makes in its people and everything its
employees value in the employment relationship.

Compensation management is a segment of management or human resource management focusing

on planning, organizing, and controlling the direct and indirect payments employees receive for
the work they perform. Compensation includes direct forms such as base, merit, and incentive pay
and indirect forms such as vacation pay, deferred payment, and health insurance. Compensation
does not refer, however, to other kinds of employee compensations such as recognition ceremonies
and achievement parties. The ultimate objectives of compensation management are: efficient
maintenance of a productive workforce, equitable pay, and compliance with federal, state, and
local concomitant regulations based on what companies can afford.

The online (HR.-guide) presents compensation management as a systematic approach to providing

monetary value to employees in exchange for work performed. It further states that compensation
can help in achieving several purposes assisting in recruitment, job performance, and job
satisfaction.

The basic concept of compensation management is rather simple: employees perform tasks for
employers and so companies pay employees wages for the jobs they do. Consequently,
compensation is an exchange or a transaction, from which both parties employers and employees
benefit: both parties receive something for giving something. Compensation, however, involves
much more than this simple transaction. From the employer's perspective, compensation is an issue
of both affordability and employee motivation. Companies must consider what they can reasonably
afford to pay their employees and the ramifications of their decisions: will they affect employee
turnover and productivity? In addition, some employers and managers believe pay can influence
employee work ethic and behavior and hence link compensation to performance. Moreover social,
economic, legal, and political forces also exert influence on compensation management, making
it a complicated yet important part of managing a business.

Compensation management is one of the central pillars of human resources management (HRM).
It is concerned with the formulation and implementation of strategies and policies that aim to
compensate people fairly, equitably and consistently in accordance with their value to the
organization (Armstrong, 2006).). This encourages top-performers to work harder and helps to
build a competitive atmosphere in the organization. Armstrong, (2006) postulate that
compensation management is an integral part of HRM approach to managing people and as such
it supports the achievement of business objectives and it is strategic in the sense that it addresses
longer term issues relating to how people should be valued for what they want to achieve; It is
therefore integrated with other HRM functions, especially those concerned with human resources
development.

In general terms rewards programmes come within the overall concept of compensation strategies
which are defined as the “deliberate utilization of the pay system as an essential integrating
mechanism through which the efforts of various sub-units or individuals are directed towards the
achievement of an organization’s strategic objectives” (Gomez-Mejia and Balkin, 1992) as found
in Reena and Shakil (2009). All businesses use pay, promotion, bonuses or other types of rewards
to encourage high levels of performance.

Armstrong (2006) in his own analysis says compensation management is all about developing a
positive employment relationship and psychological contract that adopts a total compensation
approach which recognizes that there are a number of ways in which people can be compensated.
Other writers (Bob 2001; Brown 2003; Anyebe 2003) see compensation management as being
based on a well-articulated philosophy- a set of beliefs and guiding principles that are consistent
with the values of the organization which recognizes the fact that if HRM is about investing in
human capital from which a reasonable return is required, then it is proper to compensate people
differently according to their contribution. This emphasizes the development of the skills and
competencies of employees in order to increase the resource-based capability of the organization.

Harrison and Liska (2008) in their study posit that compensation is the center piece of the
employment contract-after all it is the main reason why people work. This includes all types of
compensations, both intrinsic and extrinsic, that are received as a result of employment by the
organization. In another study, Brown (2003) sees compensation as a return in exchange between
their employees and themselves as an entitlement for being an employee of the organization, or as
a compensation for a job well done.

Remuneration does not simply compensate employees for their efforts- it also has an impact on
the recruitment and retention of talented people according to Milkovich and Newman (2001). They
argue that compensation philosophies and objectives must reflect the overall culture, philosophies
and strategic plans of the organization. They posit that there are two basic compensation
philosophies, which should be seen as opposite ends of a continuum. At one end of the continuum
is the entitlement philosophy, at the other end, the performance-oriented philosophy.

Employees and managers who subscribe to the entitlement philosophy believe that individuals
who have worked another year are entitled to a rise in base pay and that all incentives and benefit
programs should continue unchanged regardless of changing industry or economic conditions. On
the other hand, in case of performance-oriented approach, no one is guaranteed compensation just
for adding another year to organizational service instead pay and incentives are based on
performance differences among employees. Employees and those who do not perform
satisfactorily receive little or no increase in compensation. It is therefore critical that organizations
align their compensation practice with performance to enhance the achievement of organizational
goals and enhance competitive advantage.

People are now seen as the primary source of a company’s competitive advantage. Therefore, the
way people are treated increasingly determines whether an organization will prosper or even
survive. Organizations are under constant pressure to enhance and improve their performance and
are realizing that an interdependent relationship exists between organizational performance and
employee performance.

OBJECTIVES OF COMPENSATION MANAGEMENT

The basic objective of compensation management can be briefly termed as meeting the needs of
both employees and the organization. Since both these needs emerge from different sources, often,
there is a conflict between the two. This conflict can be understood by agency theory which
explains relationship between employees and employers. The theory suggests that employers and
employees are two main stakeholders in a business unit, the former assuming the role of principals
and the latter assuming the role of agents. The compensation paid to employees is agency
consideration.

Each party to agency tries to fix this consideration in its own favor. The employers want to pay as
little as possible to keep their costs low. Employees want to get as high as possible. The
compensation management tries to strike a balance between these two with following specific
objectives:

 Attracting and Retaining Personnel:

From organization’s point of view, the compensation management aims at attracting and retaining
right personnel in the organization. In the Indian corporate scene, there is no dearth of personnel
at operative levels but the problems come at the managerial and technical levels particularly for
growing companies. Not only they require persons who are well qualified but they are also retained
in the organization. In the present day context, managerial turnover is a big problem particularly
in high knowledge based organizations.
  Motivating Personnel:

Compensation management aims at motivating personnel for higher productivity. Monetary

compensation has its own limitations in motivating people for superior performance.

Alfie (2013) has gone to the extent of arguing that corporate incentive plans not only fail to work
as intended but also undermine the objectives they intend to achieve. He argues that this is due to
inadequate psychological assumptions on which reward systems are based. His conclusions are as
follows:

 Rewards punish people-their use confirms that someone else is in control of the
employee.

 Rewards rupture relationships-they create competition where teamwork and

collaboration are desired.

 Rewards ignore reasons-they relieve managers from the urgent need to explore why an
employee is effective or ineffective.

 Rewards discourage risk taking-employees tend to do exactly what is required to earn

the reward, and not any more.

 Rewards undermine interest-they distract both manager and the employee from
consideration of intrinsic motivation.

Notwithstanding these arguments, compensation management can be designed to motivate people

through monetary compensation to some extent.

 Optimizing Cost of Compensation:

Compensation management aims at optimizing cost of compensation by establishing some kind of

linkage with performance and compensation. It is not necessary that higher level of wages and
salaries will bring higher performance automatically but depends on the kind of linkage that is
established between performance and wages and salaries. Compensation management tries to
attempt at this.

 Consistency in Compensation:

Compensation management tries to achieve consistency-both internal and external-in

compensating employees.

Internal consistency involves payment on the basis of criticality of jobs and employees'
performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, higher
compensation is attached to higher performers in the same job.

External consistency involves similar compensation for a job in all organizations. Though there
are many factors involved in the determination of wage and salary structure for a job in an
organization which may result into some kind of disparity in the compensation of a particular job
as compared to other organizations, compensation management tries to reduce this disparity.

Furthermore on the objectives of compensation management, according to Obikoya (2002), reward

or compensation administration is a key element in any discussion of the concept of human
resources management. Effective compensation administration is a critical factor in achieving
productive work and services. In addition, the compensation objectives of an employer are to:

 Ensure that rewards are given for service rendered by employees.

 Help to keep employees contented, minimize employee’s complaints and grievances that
might result into industrial actions strikes, etc.

 Reassure employees that pay policies and pay levels are fair and will be applied across the
board uniformly and consistently with no regard for favouritism thereby minimizing
interpersonal and intergroup frictions.

 Induce the employees towards higher performance height.

 Serve as a weapon in the application of principle of rewards and sanctions to employees

who identify with organization on one hand and those who defy organization rules, and
  Ensure that the organization gets maximum result from its limited means through good and
adequate control of labour cost.

According to Obikoya (2002), based on the above reasons, employers or organizational managers
should devise effective compensation administration that could satisfy the expectations and
aspirations of the employees and sustain them in order to satisfy organization’s productivity and
profitability motives.

COMPENSATION ADMINISTRATION MODEL

A general model of compensation administration encompasses the creation and management of a

pay system based on four basic, interrelated policy decisions this study adopted the model Ezeh
(2013), the model has four points to it: internal consistency, external competitiveness, employee
contributions, and administration of the compensation program. Compensation professionals
work with these policy decisions according to individual corporations' needs, keeping in mind the
ultimate objectives of compensation administration efficiency, equity, and compliance. Companies
develop their individual compensation strategies by placing varying degrees of emphasis on these
four policy decisions;

 INTERNAL CONSISTENCY

Compensation managers seek to achieve internal equity and consistency—rationalizing pay within
a single organization from the chief executive officer on down—through the analysis, description,
evaluation, and structure of jobs. The objective of internal consistency is for compensation
managers to determine equitable rates of pay by considering the similarities and differences in
work content or job skills as well as the different contributions employees with different jobs and
skill levels make to a company's goals.

 EXTERNAL COMPETITIVENESS

Achieving external competitiveness in the area of compensation means balancing the need to keep
operating costs (including labor costs) low with the need to attract and retain quality workers.
External competitiveness is how a company's rates of pay compare to those of its competitors.
Compensation managers achieve external competitiveness by comparing wage levels within their
industry, examining their companies' resources and goals, and establishing their own pay levels
accordingly.

 EMPLOYEE CONTRIBUTIONS

This policy area involves the weight companies choose to place on employee performance in
determining a compensation program. Some companies may choose to pay all employees the same
wage, while others decide to compensation employees for seniority and productivity. Companies
that choose the latter route tend to emphasize incentive and merit aspects of compensation
programs.

 ADMINISTRATION

The administrative policy refers to the tasks of compensation managers in designing and
implementing a pay program. Taking into consideration the previous three policies, compensation
managers must choose the components that they will include in a company's compensation
program—that is, which kinds of base pay, wage and salary add-ons, incentives, and benefits they
will offer employees with different jobs and skill levels. Administration also involves determining
whether the pay program will attract and retain needed employees successfully, whether
employees consider the pay program fair, how competitors pay their employees and if competitors
are more or less productive.

INTERNAL EXTERNAL
CONSISTENCY COMPETITIVENESS
COMPENSATION

ADMINISTRATION

EMPLOYEE ADMINISTRATION
CONTRIBUTIONS

Source: Ezeh Chinenye 2013.

COMPONENTS OF COMPENSATION SYSTEM:

The literal meaning of compensation is to counter-balance. In the case of human resource

management, compensation is referred to as money and other benefits received by an employee
for providing services to his employer. Money and benefits received may be in different forms-
base compensation in money form and various benefits, which may be associated with employee's
service to the employer like provident fund, gratuity, and insurance scheme, and any other payment
which the employee receives or benefits he enjoys in lieu of such payment. Cascio (2012), has
defined compensation as follows:

"Compensation includes direct cash payments, indirect payments in the form of employee benefits
and incentives to motivate employees to strive for higher levels of productivity”

Based on above description of compensation, we may identify its various components as follows:

Wage and Salary:

According to Obikoya (2002), a wage is the payment made to a manual worker. It is nearly always
expressed as a rate per hour. Wage and salary are the most important component of compensation
and these are essential irrespective of the type of organization. Wage is referred to as remuneration
to workers particularly, hourly-rated payment. In the same vein, (Obikoya, 2002), defines salary
as a fixed periodical payment to a non- manual employee. It is usually expressed in annual terms,
implying a relatively permanent employment relationship though normally paid at monthly
intervals. Salary refers to as remuneration paid to white-collar employees including managerial
personnel. Wages and salary are paid on the basis of fixed period of time and normally not
associated with productivity of an employee at a particular time.

Incentives:

In his book, (Obikoya 2002), sees incentives as wage payment plans which tie wages directly to
productivity standards. Some incentive plans tie wages to productivity of individuals, others to the
productivity of groups or to the productivity and profitability of the total organization. Incentives
are the additional payment to employees besides the payment of wages and salaries. Often these
are linked with productivity, either in terms of higher production or cost saving or both. These
incentives may be given on individual basis or group basis.
Fringe Benefits:

Fringe benefits include such benefits which are provided to the employees either having long term
impact in the organization. These types of benefits may include group insurance (health, dental,
vision, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement,
sick leave, vacation (paid and non-paid), funding of education, as well as flexible and alternative
work arrangements.

Perquisites:

These are normally provided to managerial personnel either to facilitate their job performance or
to retain them in the organization. Such perquisites include company car, club membership, free
residential accommodation, paid holiday trips, stock options, etc.

METHODS OF FIXING WAGES AND SALARIES

According Nmadu, (1999) the following methods suffice for the fixing of wages and salary.

 Agreement between Employer and Employees: Generally when employers advertise

openings for jobs, what they intend to pay is usually attached to it or stated fairly clearly.
Employees applying and accepting such jobs are implying that they agree to work at the
stipulated rates even though they had no hands in fixing it. But such wages must have been
based on factors such as labour market and the entire industry. The employer is in a strong
bargaining position in this instance, but highly skilled workers who are few are however
able to have a strong hand in fixing attractive remuneration.

 Collective Agreements: This is the commonest method of fixing wages in the privates
sector, i.e. collective agreements. Since individual workers are generally weak in collective
bargaining with the employer, consequently unions are used to negotiate with greater
strength with the employer. Unions and associations have had a major impact on wage
structures, wage levels and individual wage determinations regardless of whether specific
organizations are organized or not beginning from the early stages of job analysis and job
evaluation- all of which are served at the bargaining table.

 Voluntary/ Compulsory Arbitration: Before 1969 arbitration between unions and

management over wages was voluntary. Both sides had to agree to go to arbitration but
 with civil war and general unrest among trade unions especially with regards to the cost of
living, arbitration was made compulsory by the Trade disputes Decree of 1973. This decree
established an industrial arbitration tribunal which had to look into all trade disputes
including wages. On the basis of presentations and evidence the tribunal makes an award
that it deems socially just, economical sound and in the interests of the parties to the dispute
and the country.

 Minimum Wages Board: because not all organizations are unionized, some countries tend
to pay unduly low wages leading to deprivation of workers. Government intervention in
Nigeria in the form of statutory regulation of wages became necessary by decree 1973 of
Wages boards and industrial councils. This consists of:

o Industrial wages board: empowers the federal commission of labour,

employments and productivity to establish boards to govern employers in relation
to functions of regulating wages and other conditions of employment especially
where they are considered less favourable than the statutory regulations.

o National Wages Board: examines applications to all unskilled workers, from time
to time examines the adequacy of wages and makes recommendations to the
commissioner of labour.

o Area Minimum Wages Committee: carries out specific investigations and makes
recommendations.

o Joint Industrial Council: employers and workers in any industry can establish
joint industrial councils to perform the role of collective bargaining.

 Job Evaluation Systems in Fixing Rates of Pay: hallmarks of success in compensation

management as in other areas include understandability, workability and acceptability. A
broad objective in designing pay systems is to assign a monetary value to each job (a base
rate) and an orderly procedure for increasing it. In job evaluation, four basic tools are
needed:

 Job analysis and job description;

  A job evaluation plan

 Pay surveys

 A pay structure.

INCENTIVE COMPENSATION

Incentive compensation is a term concerned with the use of money as a means of motivation to
improved performance (Nmadu, 1999). Even though people tend to deny the existence of the
purely economic man, it cannot be denied that money plays a powerful role in motivating many
people. If money or any factor is to motivate people, employees must both desire it and believe it
will be forthcoming if they behave in the manner prescribed.

Classification of Incentives:

All forms of incentives can be broadly classified into two kinds namely,

 Financial Incentives, and

 Non-financial Incentives.

Financial Incentives

Financial incentives or pecuniary incentives are the most original of all the incentives. It is given
in the form of money. The financial incentives still form the most important influencing and
motivating factor up to a certain limit. Because it is only by virtue of the monetary compensation
that the workers can satisfy their fundamental needs such as food, clothing, shelter etc. The
financial incentives may be either direct or indirect. Direct incentives include wages, bonus and
other incentives directly given to the workers in the form of cash. Indirect financial incentives
include subsistence allowance expenses, medical expenses etc.

Non-financial incentives:
Non-financial or non-pecuniary incentives include all other influences planned or unplanned,
which stimulate exertion. Mere monetary incentive cannot help the management in solving all the
problems of industrial unrest. Further additional cash wage may also tempt the workers to misuse
the money in vices like gambling, drinking etc.

Under such circumstances, the nonfinancial incentives have a significant role to play. Such
incentives create a healthy atmosphere and change the mental outlook of the workers. They make
the working class more stabilized and economically sound. Thus, in short, the workers by virtue
of the non-financial incentives are enabled to enjoy a richer and fuller life. Experiences of foreign
countries particularly countries like Britain, America and Japan have shown that there is a high
degree of positive correlation between non-financial benefit schemes and labor productivity.

Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below:

 Job Security:

The management must try its best to create a sense of job security. There should be no risk of
retrenchment, demotion and termination. Experiences have also shown that the productivity is less
in those concerns where workers have no feeling of safe and secure. But it is high in those concerns
where they have a feeling of job security.

 Recognition:

Recognition of work is the essence of securing good work. Efficient people would naturally like
to get recognition for their skill and excellence in their work. Such recognition can do many things
than what a cash reward can do. Of course it is not practicable for the superiors to praise everybody
for everything done by them. But the technique of praise must be practiced as far as possible.

 Participation:

Workers feel more satisfied when they are given an opportunity to raise their voice in handling the
affairs of the enterprise. Since they actually take part in the decision-making their co-operation is
assured.

 Pride in job:
The workers must be made to feel pride in their job. Various techniques can be employed to
develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc. can
effectively stimulate the workers pride in their job and in the firm.

 Delegation of Responsibility:

Delegation of rights and responsibilities to execute a given task often proves to be a strong
motivating factor. By delegation the superior trusts his workers and stimulates them to show better
results

 Other Incentives:

Other incentives like quick promotion, provisions of facilities for development and training,
provision of labor welfare

amenities etc. also have a significant role to play in motivating the employees.

DIFFICULTIES OF INCENTIVE COMPENSATION PLANS

In applying the incentive compensation plan, the following difficulties are often encountered;

1. Establishing some acceptable and reasonably accurate measure of varying employee

performance.

2. Relating such measures to desired organizational goals.

3. Data concerning such varying performance must be collected, daily, weekly, or monthly.

4. Standards established showing difficulty among the covered group.

5. Total compensation of salary plus incentive should be consistent among incentive groups
and between incentive and non-incentive groups.

6. Performance standards must be adjusted periodically to account for both minor and major
changes in work procedures.

7. Union opposition must be expected and dealt with.

 8. Varied employee reactions to the designed incentives must be anticipated.

Types of financial Incentive Plans

In general, according to (Nmadu, 1999) the following plans can be used when incentive
compensation is to be practiced in the organization;

 Piece rates

 Straight Piecework Plan: this is a fixed price per unit of output where hourly
earnings are not guaranteed for the time worked.

 Taylor Piecework plan: here there are two plans, one for above average and the
other for below average performance.

 Group Piecework Plan: where the work of a single individual cannot be

differentiated from that of a group, a standard is set, below the standard hourly rates
are paid, above the standard a group bonus is earned which can be shared equally.

 Time Bonuses:

 Bonus based on time saved:

1. The Halsey plan: Hours saved by an employee are computed by

subtracting hours worked from standard time. Time saved is paid
50% of its value.

2. The 100% time premium plan: here accurate time standard are
created through time study, time saved is awarded full value.
 3. The Bedaux Plan: Here the basic unit of time is the minute termed
a B and the employee is paid 75%; the 25% is paid to the personnel
who made the meeting of the standard possible.

 Bonus Based on Time Worked

1. The Rowan Plan: Here an efficiency percentage is computed by

dividing time saved by the standard time, e.g. if an employee saved 4
out of 12 hours, his bonus becomes: income for 8 hours worked plus
4/12 = 33.5% efficiency. This is used when performance standards are
very poor.

2. The Emerson Plan: it is also based on an index of efficiency. Standard

time is divided by time actually worked. Then arbitrary scales of bonus
percentages are prepared for varying efficiencies. Bonuses are also paid
for low efficiency so that employees can be encouraged through
expectancy.

 Bonus Based on standard time:

1. The Gantt task and bonus plan; a bonus percentage is multiplied by

the value of the standard time. Therefore it pays more than all the
other plans e.g. if below standard, you get the standard rate but if
you make the standard, you get the standard rate plus 20% x the
standard.

FACTORS DETERMINING COMPENSATION MANAGEMENT POLICY

In applying the theory of marginal revenue product in labour economics, it says that the value of
a person’s labour is what someone is willing to pay for it. In practice, there are a number of factors
that interact to determine the compensation policies in an organization. According to Nmadu
(1999), these factors are:
 Comparable wages: to most employers and labour unions, what constitutes a “fail” wage
is determined by the wages paid by other employers for the same type of work. This is
subject to research (collection of information systematically) or that wages adhere to
principles of consistency, equality and rationality. This factor is simple to adapt but must
not ignore difference in industries and the contents of jobs. “Survey made to do the
following:

a) Select the organizations to include in the survey based on comparable jobs.

b) List key jobs and positions common to all compared on the survey.

c) Prepare a schedule for information to be obtained.

d) Personal interviews with counterparts in selected companies.

e) Comparison of wages scales against selected key jobs.

 Financial Ability of the Employer: all organizations operating in an economic

community must not necessarily pay the same wages for the same type of skill or job. Each
company has a free hand to pay employees according to its own financial ability. Such
freedom is of course limited. But organizations can only pay for that which it has an ability
to pay especially since higher wages give more purchasing power or increased prosperity
for the community.

 Labour Market Conditions: Labour markets have a major impact on wage levels and
structures. Companies in different locations e.g. Lagos, Portharcourt, and Warri due to
forces of demand and supply and cost of living pay differing wages. Works that are highly
hazardous also attract higher pay.

 Legislation: The law has provisions for minimum wages to be paid, maximum hours to
be worked, overtime, and income security (gratuity and pension benefits) compensation
in case of disability. In Nigeria, glaringly lacking are social security/ (old age)
unemployment benefit and living wage.

 Collective Bargaining: a major influence on wages and compensation policy in unionized

companies is collective bargaining by way of level of wages and behaviour of workers in
 the relevant market. In addition to pay and benefits, collective bargaining is used to
negotiate procedures for administrating pay, procedures for resolving grievances
regarding compensation decisions and methods used to determine the relative worth of
jobs.

 The Cost of Living: this has been and will continue to be a major determinant of
compensation policies. When the cost of living is rising, there is great pressure by workers
especially through unions for employers to adjust wages to offset reduction in real wages.
This is because movement in cost of goods (retail prices) directly influences the
purchasing power of wage packets. COLA (cost of living allowance) is national concern.
Employees need to keep in touch with movement of cost of living indices in the country
especially on the basket goods. Such is often handicapped by the lack of statistics which
is a prevailing problem in Nigeria. Good sources of statistics are the federal office of
statistics report, CBN statistical bulletins. On the basis of these reports, a company can
then determine if the cost of living is rising and therefore increase wages. But these have
nothing to do with what is produced; they make up for reduction in real wages.

 Managerial Attitudes and Organization ability to pay: regardless of an organization’s

espoused competitive position on wages, its ability to pay will ultimately be a key factor
that limits actual wages. Management philosophy and attitudes for example, desire to
maintain in or improve morale, attract to high caliber employees, reduce turnover and to
improve employees’ standard of living also affect wages as well as the relative importance
of a given position to a company. Despite the appearance of scientific precision,
compensation management will always reflect administrative judgement to a considerable
extent.

 Productivity: making sure that its members get a fair slice of the cake is of course a main
concern of every trade union. It is generally accepted that wages should bear relevance to
productivity, after all wages are the price of the labour put into making goods. The
difficulty in using this principle however lies in the fact that who takes credit for improved
performance. Only in economies with full employment and no inflation can wages be tied
strictly to productivity.
  The Living Wage: whereas the cost of living with an actual standard based on statistical
measurement, the living wage is concerned with an ideal standard. What level of pay can
sustain a man, his wife and four children in a depressed, inflation ridden economy for
instance? Living wage is used more for broad social policy and salaries’ commissions
when they recommend minimum wage levels especially for lower cadre staff.

2.2 WHAT IS ORGANIZATIONAL PERFORMANCE

Organizational performance comprises the actual output or results of an organization as measured

against its intended outputs (or goals and objectives).

According to Richard (2009) organizational performance encompasses three specific areas of firm
outcomes:

(a) Financial performance (profits, return on assets, return on investment, etcetera);

(b) Product market performance (sales, market share, etcetera); and

(c) Shareholder return (total shareholder return, economic value added, customer service, etcetera).

Specialists in many fields are concerned with organizational performance including

strategic planners, operations, finance, legal, and organizational development.

In recent years, many organizations have attempted to manage organizational performance using
the balanced scorecard methodology where performance is tracked and measured in multiple
dimensions such as:

 Financial performance (e.g. shareholder return);

 Customer service;

 Social responsibility (e.g. corporate citizenship, community outreach);

 Employee stewardship. Employee performance and employee retention.

 Profit maximization.

The focus of our study is on employee performance as a function of organizational compensation

strategies.
2.3 EFFECT OF COMPENSATION MANAGEMENT

Employees today are not willing to work only for the cash alone, they expect 'extra'. This extra is
known as employee benefits. Also known as fringe benefits, Employee benefits financial as well
as are non-financial form of compensation offered in addition to cash salary to enrich workers’
lives.

Although expensive, there are many intrinsic benefits to providing your employees with a
comprehensive benefit plan. For most, it is the ability to find and keep highly qualified staff that
is the key driver. With the sector being highly competitive and the number of new employees
entering the workforce dwindling, employers are challenged to become even more creative and
responsive in the design, timing and generosity of their benefit plans. The more progressive the
organization, the more flexible the structure is in response to today’s challenges: i.e. like having
four different generations of employees working side by side. Employers who continue to provide
the more traditional and limited program, may find it more difficult to find and keep different types
of employees. So you would have to carefully design your benefit package. Your package may
include a cell phone to each worker, taking them to a training workshop or seminar, giving them a
day or two off every month and so on. While deciding on the benefits package, do consider the
associated costs. The advantages can be seen below.

Advantages of Compensation Management Packages

A well designed compensation and benefits plan helps to attract, motivate and retain talent in an
organization. A well designed compensation & benefits plan will benefit a firm or
business/employee in the following ways;

Advantage to the organization.

1. Performance Enhancement: Employees would be happy with their jobs and would love to
work for such an organization if they get fair compensations in exchange of their services.

2. Motivation: We all have different kinds of needs. Some of us want money so employees work
for the company which gives them higher pay. Some value achievement more than money, they
would associate themselves with firms which offer greater chances of promotion, learning and
development. A compensation plan that hits workers’ needs is more likely to motivate them to act
in the desired way.

3. Low Absenteeism: when worker’s compensations are adequately managed, employees will
have the zeal and enthusiasm to be regular at work instead of wasting time at home. Although
some tend to stay idle at work place also, but when they are treated well they will offer value for
it.

4. Low Turnover: employees will not be willing to work for any other organization as long as
they are treated well and get their compensations at the right time and measure. So there will be a
low rate of employee turnover.

5. Higher output: By providing incentives to his employees, the employer is able to induce them
to work better. This leads to higher output.

6. Greater profits: Needless to say, higher output results in greater profits for the business. This
happens in two ways. First, the cost per unit becomes less and second, the enterprise is able to keep
the selling price low and this result in greater sales.

7: No problem of idle time:

In an organization where no proper incentives are available for the workers, the tendency will be
to while away the time. When suitable incentives are available, the workers become time
conscious. They begin to see every minute in terms of money.

8: Supervision does not pose any problem:

When suitable incentives are available, the workers become duty conscious. The need for close
supervision, thus, does not arise.

9. Possible to identify inefficient and dull workers:

If, in spite of the incentive schemes, some workers are able to earn only their normal wage, it
should mean that they are basically dull. The employer, therefore, has to decide whether to retain
them or subject them to rigorous training.
10. Rate of labor turnover is bound to be low:

If adequate incentives are available to the workers, they may not have a feeling of dissatisfaction.
Such workers are sure to have greater work commitment and therefore may not leave the
organization. The rate of labor turnover, as a result, is bound to be low.

11. Reduction in complaints and grievances:

As the organization makes available suitable incentives to the workers, they may not have anything
to complain about. This leads to reduction in complaints and grievances.

12. By providing increased access and flexibility in employee benefits, employers can not only
recruit but retain qualified employees.

13. Providing benefits to employees is seen as managing high-risk coverage at low costs and
easing the company's financial burden.

14. Employee benefits have been proven to improve productivity because employees are more
effective with they are assured of security for themselves and their families.

Advantage to your employees:

1. Peace of Mind: when incentives and benefits are offered workers in the right measure, it relieves
them from certain fears. The workers as a result now work with relaxed mind.

2. Increases self-confidence: Every human being wants his/her efforts to get acknowledgment.
Employees gain more and more confidence in them and in their abilities if they receive just
compensations. As a result, their performance level shoots up.

3. Efficient workers are able to earn more:

Such of those workers who are highly efficient are able to earn more by way of performance
bonus, higher commission and so on.

4. Employees with personal life and disability insurance can enjoy additional protection including
income replacement in the event of serious illness or disability.

5. Employees can feel a sense of pride in their employer if they are satisfied with the coverage
they receive.
Simply put, the elements of a total compensations program constitute all the things a business uses
to attract employees, including salary, bonuses, incentive pay, benefits and employee growth
opportunities such as professional development and additional training. This system provides a
number of advantages to companies, particularly small businesses in which business owners and
managers must foster positive personal relationships with employees. The system works in a
cyclical manner consisting of four total parts:

 Employee Retention

 Employee Performance

 Controllable Expenses

 Program Administration

2.5 COMPENSATION MANAGEMENT PROCESS:

In order to achieve the objectives of compensation management, it should proceed as a process.

This process has various sequential steps as shown:

 Organization’s strategy

 Compensation policy

 Job analysis and evaluation

 Analysis of contingent factors

 Design and implementation of compensation plan

 Evaluation and review

Organization’s Strategy:
Organization’s overall strategy though not a step of compensation management is the starting point
in the total human resource management process including compensation management.
Companies operating in different types of market/product having varying level of maturity, adopt
different strategies and matching compensation strategy and blend of different compensation
methods. Thus, it can be seen that organizations follow different strategies in different market
situations and align their compensation strategy and contents with these strategies. In a growing
market, an organization can expand its business through internal expansion or takeover and merger
of other organizations in the same line of business or a combination of both. In such a growing
market, the inputs, particularly human resources, do not grow in the same proportion as the
business expands. Therefore, in order to make the growth strategy successful, the organization has
to pay high cash to attract talents. Cascio has observed that in viewing the compensation from
strategic point of view, the companies do the following:

 They recognize remuneration as a pivotal control and incentive mechanism that can be
used flexibly by the management to attain business objectives.

 They make the pay system an integral part of strategy formulation.

 They integrate pay considerations into strategic decision-making processes, such as those
that involve planning and control.

 They view the company's performance as the ultimate criterion of the success of the
strategic pay decisions and operational remuneration programmes.

Compensation Policy:

Compensation policy is derived from organizational strategy and its policy on overall human
resource management. In order to make compensation management to work effectively, the
organization should clearly specify its compensation policy, which must include the basis for
determining base compensation, incentives and benefits and various types of perquisites to various
levels of employees. The policy should be linked with the organizational philosophy on human
resources and strategy. Besides, many external factors which impinge on the policy must also be
taken care of.

Job Analysis and Evaluation.

Job analysis provides basis for defining job description and job specification with the former
dealing with various characteristics and responsibilities involved in a job and the latter dealing
with qualities and skills required in job performer. Job analysis also provides base for job
evaluation which determines the relative worth of various jobs in the organization. The relative
worth of various jobs determines the compensation package attached with each job.

Analysis of Contingent Factors:

Compensation plan is always formulated in the light of various factors, both external and internal,
which affect the operation of human resource management system. Various external factors are
conditions of human resource market, cost of living, level of economic development, social factors,
pressure of trade unions and various labor laws dealing with compensation management. Various
internal factors are organization’s ability to pay and employees' related factors such as work
performance, seniority, skills, etc. These factors may be analyzed through wage/salary survey.

Design and Implementation of Compensation Plan:

After going through the above steps, the organization may be able to design its compensation plan
incorporating base compensation with provision of wage/salary increase over the period of time,
various incentive plans, benefits and perquisites. Sometimes, these are determined by external
party, for example, pay commissions for Government employees as well as for public sector
enterprises. After designing the compensation plan, it is implemented. Implementation of
compensation plan requires its communication to employees and putting this into practice.

Evaluation and Review:

A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety of
factors which are dynamic. Therefore, compensation management should have a provision for
evaluating and reviewing the compensation plan.

After implementation of the plan, it will generate results either in terms of intervening variables
like employee satisfaction and morale or in terms of end-result variable like increase of
productivity. However, this latter variable is more important. The evaluation of compensation plan
must be done in this light. If it does not work as intended, there should be review of the plan
necessitating a fresh look.
2.6 THEORETICAL FRAMEWORK

Motivation theories have been associated with rewards and compensation overtime. This means
that when employees are rewarded for a good job, they get motivated and move to the next level
in terms of performance and productivity.

For this reason, motivation theories will be used to explain the concept of reward and how it affects
the performance of individual employees. The theories in this work adapted from the work of Nnaji
(2013) which was an empirical study on the importance of organizational rewards.

GOAL THEORY - REWARD & MOTIVATION

Goal theory is a theory that proposes that all human actions and behavior are motivated by a goal.
Goal theory proposes that human beings are more motivated to act when there is a reward at the
end of the performance of a task or a behavior. The goal theory proposes that a reward at the end
of a task or behavior acts as a motivation for the performance of that said task or behavior. However
the reward should be clearly stated. The end state can be the reward in itself. It is proposed that an
efficient goal must have three components: proximity, difficulty, specificity and feedback. An
ideal goal is a goal where the time between the reaching out and the end state is close. It is moderate
in difficulty, neither too easy, to present some challenge, nor too difficult, so that success seem
possible.

The goal should be specific. The individual must understand what is expected out of him, to start
out for the goal. A specific goal gives direction of focus to that specific goal and away from
distractions.

Feedback is necessary for measuring progress towards the goal. Feedback makes it possible to
know whether the level of efforts is adequate and in the proper direction or needs corrections.

Implication of the goal setting theory.

The implication of this theory for employee performance is that it induces performance of
employee. When an employee has it in mind that he or she will be rewarded for a particular cause,
then he tends to do it well thereby improving his performance level.
EXPECTANCY THEORY

The expectancy theory was proposed by Victor Vroom of Yale School of Management. Vroom
stresses and focuses on outcomes, and not on needs unlike Maslow and Herzberg. The theory states
that the intensity of a tendency to perform in a particular manner is dependent on the intensity of
an expectation that the performance will be followed by a definite outcome and on the appeal of
the outcome to the individual.

The Expectancy theory states that employee’s motivation is an outcome of how much an individual
wants a reward (Valence), the assessment of the likelihood that the effort will lead to expected
performance (Expectancy) and the belief that the performance will lead to reward
(Instrumentality). In short, Valence is the significance associated by an individual about the
expected outcome. It is an expected and not the actual satisfaction that an employee receives after
achieving the goals. Expectancy is the faith that better efforts will result in better performance.
Expectancy is influenced by factors such as possession of appropriate skills for performing the
job, availability of right resources, availability of crucial information and getting the required
support for completing the job. Instrumentality is the faith that if you perform well, then a valid
outcome will be there. Instrumentality is affected by factors such as believe in the people who
decide who receives what outcome, the simplicity of the process deciding who gets what outcome,
and clarity of relationship between performance and outcomes. Thus, the expectancy theory
concentrates on the following three relationships:

 Effort-performance relationship: What is the likelihood that the individual’s effort be

recognized in his performance appraisal?
 Performance-reward relationship: It talks about the extent to which the employee believes
that getting a good performance appraisal leads to organizational rewards.
 Rewards-personal goals relationship: It is all about the attractiveness or appeal of the
potential reward to the individual.

Vroom was of view that employees consciously decide whether to perform or not at the job. This
decision solely depended on the employee’s motivation level which in turn depends on three
factors of expectancy, valence and instrumentality.
Advantages of the Expectancy Theory

 It is based on self-interest individual who want to achieve maximum satisfaction and who
wants to minimize dissatisfaction.
 This theory stresses upon the expectations and perception; what is real and actual is
immaterial.
 It emphasizes on rewards or pay-offs.
 It focuses on psychological extravagance where final objective of individual is to attain
maximum pleasure and least pain.

Limitations of the Expectancy Theory

The expectancy theory seems to be too idealistic because quite a few individuals perceive high
degree correlation between performance and rewards.

The application of this theory is limited as reward is not directly correlated with performance in
many organizations. It is related to other parameters also such as position, effort, responsibility,
education, etc.

Implications of the Expectancy Theory

 The managers can correlate the preferred outcomes to the aimed performance levels.
 The managers must ensure that the employees can achieve the aimed performance levels.
 The deserving employees must be rewarded for their exceptional performance.
 The compensation and reward system must be fair and just in an organization.
 Organizations must design interesting, dynamic and challenging jobs.

The employee’s motivation level should be continually assessed through various techniques such
as questionnaire, personal interviews, etc.

REINFORCEMENT THEORY

Reinforcement theory of motivation was proposed by BF Skinner and his associates. It states that
individual’s behaviour is a function of its consequences. It is based on “law of effect”, i.e.,
individual’s behaviour with positive consequences tends to be repeated, but individual’s behaviour
with negative consequences tends not to be repeated. This theory focuses totally on what happens
to an individual when he takes some action. Thus, according to Skinner, the environment of the
organization must be designed effectively and positively so as to motivate the employee. This
theory is a strong tool for analyzing controlling mechanism for individual’s behaviour. However,
it does not focus on the causes of individual’s behaviour.

The managers use the following methods for controlling the behaviour of the employees:

 Positive Reinforcement: This implies giving a positive response when an individual

shows positive and required behaviour. For example - Immediately praising an employee
for coming early to work. This will increase probability of outstanding behaviour occurring
again. Reward is a positive reinforce, but not necessarily. If and only if the employees’
behaviour improves, reward can said to be a positive reinforcement. Positive reinforcement
stimulates occurrence of behaviour. It must be noted that more spontaneous is the giving
of reward, the greater reinforcement value it has.

 Negative Reinforcement- This implies rewarding an employee by removing negative /

undesirable consequences. Both positive and negative reinforcement can be used for
increasing desirable / required behaviour.

 Punishment- punishment means applying undesirable consequence for showing

undesirable behaviour. For instance - Suspending an employee for breaking the
organizational rules. Punishment can be equalized by positive reinforcement from
alternative source.

 Extinction- It implies absence of reinforcements. In other words, extinction implies

lowering the probability of undesired behaviour by removing reward for that kind of
behaviour. For instance - if an employee no longer receives praise and admiration for his
good work, he may feel that his behaviour is generating no fruitful consequence. Extinction
may unintentionally lower desirable behaviour.

Implications of Reinforcement Theory

Reinforcement theory explains in detail how an individual learns behaviour. Managers who are
making attempt to motivate the employees must ensure that they do not reward all employees
simultaneously. They must tell the employees what they are not doing correct. They must tell the
employees how they can achieve positive reinforcement.

The above discussed theories have their effects on the performance of employees just as discussed,
when employees. Goal theory induces performance from employees since they know that they will
get rewarded in the end. The expectancy theory has it that since an employee wants a reward then
his performance will depend on how much he or she wants the reward. While reinforcement theory
uses the reward for good behavior to encourage positive performance and uses threat of
punishment to correct wrong behavior leading to positive performance.

2.7 EMPIRICAL FRAMEWORK

According to Asghar & Muhammad (2012), Employees are considered as the human capital of
any organization. If employees are motivated and satisfied they will perform their duties diligently
and actively. In this research article, data of 186 employees working in Pharmaceutical industry is
analyzed. The results indicated gender-wise and age-wise comparison of motivation & satisfaction
of employees with respect to salary and position. Hypotheses developed to find relationship
between financial rewards, motivation and satisfaction of employees. A positive relationship found
between financial rewards, motivation and satisfaction. Overall results indicate employees
working in Pharmaceutical industry are being offered good financial rewards. They are motivation
in performing their duties and satisfied with their salary and job position.

In the work of Kalim, Syed and Mohammad (2012), their work investigates the role played by
rewards in the process of motivating employees. The study explored factors determining rewards
and their impact on employee motivation and endeavors to influence the commercial banks for a
consideration of a more systematic and structured approach to acknowledge employees’ efforts
which would in turn flourish high performance culture in commercial banks of Pakistan. The study
also attempted to examine the relationship between rewards and employee motivation and the
effects of biographical variables on work motivation. Descriptive statistics based on frequency
tables and graphs were used in the study to provide information on demographic variables. The
results are analyzed in terms of descriptive statistics followed by inferential statistics on the
variables. The study revealed multiple factors affecting employee work motivation and
performance which have got their own unique approach, significance and contribution towards
motivation and performance that elevate and maximize organizational progress. A total of 200
questionnaires were distributed to respondents and a total of 167 employees completed the
questionnaire. A quantitative methodology was used for the study and questionnaire method was
used as the measuring instrument. The four independent variables of reward included, payment,
promotion, recognition, benefits and the dependent variable was employee work motivation. The
results indicate that there is a statistical significant relationship between all of the independent
variables with dependent variable employee work motivation, all the independent variables have
a positive influence on employee work motivation and result also showed that among four
independent variable promotions was most important and more influential variable. The present
study revealed that management can make use of different tactics strategies and policies to
motivate employees in work settings, but different tactics, strategies and policies would have a
different motivational impact on diverse people.

Reena and Shakil (2009), carried out a study to find out “the impact of reward and recognition
programs on employee’s satisfaction” The study was conducted from October till December; 2008
the Sample chosen for the study is 80 employees of UNILEVER companies Results-The factors
affecting satisfaction were identified; payment (0.86), promotion (0.74), working condition (0.61),
personal (0.37) as Analysis showed immense support for positive relationship between REWARD
and EMPLOYEE SATISFACTION. All these results are statistically significant thus providing
rigor and generalizability in research. Conclusion-This exploratory study suggests for the positive
relationship between reward and satisfaction.

Carolina (2010) also carried out a research in order to investigate and analyze how well the current
reward system of Motonet-Espoo helps generate employee work motivation. More specifically it
aimed to find out which aspects of the reward system functions well, and which aspects could be
further developed and improved in order to increase employee satisfaction. The theoretical part of
the study introduces different theories of motivation and rewarding. Emphasis is put on Maslow's
hierarchy of needs, the goal setting theory and the total reward system. The empirical part of the
thesis was conducted by using a quantitative research method. The data was gathered with the help
of a questionnaire and two interviews. The aim of the research was to compare the different reward
systems used in Motonet- Espoo and find the pros and cons of them. The research results revealed
how Motonet- Espoo can develop their reward system by including the employees in the decision
making process. The research supports the assumption that a well-developed and functional reward
system can increase employee motivation and satisfaction.

Puwanenthiren (2011), in a study to find out the effect of Reward System And Its Impact On
Employee Motivation In Commercial Bank Of Sri Lanka Plc, In Jaffna District. Puwanenthiren
opine that increasingly, organizations are realizing that they have to establish an equitable balance
between the employee’s contribution to the organization and the organization’s contribution to the
employee. Establishing this balance is one of the main reasons to reward employees. Organizations
that follow a strategic approach to creating this balance focus on the three main components of a
reward system, which includes, compensation, benefits and recognition. The work also indicated
that studies that have been conducted on the topic indicates that the most common problem in
organizations today is that they miss the important component of Reward, which is the low-cost,
high-return ingredient to a well-balanced reward system. A key focus of recognition is to make
employees feel appreciated and valued. Research has proven that employees who get recognized
tend to have higher self-esteem, more confidence, more willingness to take on new challenges and
more eagerness to be innovative. The aim of this study is to investigate whether rewards and
recognition has an impact on employee motivation. A biographical and Work Motivation
Questionnaire was administered to respondents. The results also revealed that staff, and employees
from non-white racial backgrounds experienced lower levels of rewards, and motivation. Future
research on the latter issues could yield interesting insights into the different factors that motivate
employees. Notwithstanding the insights derived from the current research, results need to be
interpreted with caution since a convenience sample was used, thereby restricting the
generalizability to the wider population.

Also, Arfa &Muhammad (2013), their work Determinants of Job Satisfaction Amongst Industrial
Workers. The study is summarized thus; the present study is confined to know the status of job
satisfaction amongst employees of some industrial units within the vicinity of Lahore Pakistan.
SPSS 15.0 was used to analyze the data, using correlation and multi regression analysis and
independent sample t-test. t-test results show, no evidence of a systematic difference of job
satisfaction between males and females, single and married, permanent and contract employees.
However it is observed from t-test that male, married, and permanent employees have
comparatively lower levels of job satisfaction as compared to female, single and contract
employees. The regression analysis shows that income and gender are significant predictors of job
satisfaction. The study can be helpful for the employers to design their human resource strategies
according to the changing socio-economic environment in the country.

Chris (2011), in his research work on employee performance appraisal and its implication for
individual and organizational growth, opine that Organizational performance and its resultant
efficiency and effectiveness can only be achieved when individuals are continuously appraised and
evaluated. The inability of organization to install an effective performance appraisal strategy has
hindered them from achieving competitive advantage which they require more now than ever
before. Appraisal processes are not systematic and regular and often characterized by personal
influences occasioned by organizations preoccupation to use confidential appraisal system which
hinders objectivity and fairness. Chris also opines that often organizations ignore management by
objectives, critical incidents to personal prejudices. This is retrogressive as it affects the overall
performance of the individual. 360 degrees appraisal method whereby superiors and the appraise
their subordinates, subordinates appraise their superior and each individual appraised himself or
herself and the average of all the appraisal taken to arrive at the final appraisal outcome should be
now be considered by organizations. Also post appraisal counseling whereby the appraisal
outcomes are analyzed to explain strengths and weaknesses and set agenda for better future
performance. Organizations should stop giving less attention to the evaluation of their employees
and recognize that organizational training needs can only be identified from performance appraisal
outcomes. It is an invaluable tool but in the hands of human resource management officers to
continuously evaluates and audits the performance of its employees in other to help organizations
win competitive advantage.

Muhammad, Khalid and Iqtidar (2010) in their study which empirically examines the relationship
between rewards and employee’s performance in cement industry in the Khyber Pakhtoonkhawa
Province (KPK) of Pakistan. The study is based on primary data collected from one hundred and
forty employees of various cement industry in Pakistan. A self-designed questionnaire was used
for data collection. The data was analyzed using the techniques of rank correlation coefficient and
multiple regression analysis. All the findings were tested at 0.01 and 0.05 level of significance.
The result concludes that there is a direct relationship between extrinsic rewards, intrinsic rewards
and the employees’ performance. It is also find out that recognition techniques used in cement
factories are good for the maximum performance of employee’s.

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